2011 (11) TMI 196 - HC - Income Tax

Revision - Competency of Assessing Officer to determine the arm s length price of international transactions when aggregate value thereof exceeded ₹ 5 crores, without making reference to TPO Validity of CIT assuming jurisdiction u/s 263 Held that - Instruction no.3 of the CBDT dated 25th May, 2003 states that wherever the aggregate value of international transaction exceeds ₹ 5 crores, the case should be picked up for scrutiny and reference under Section 92CA be made to the TPO. When circular is issued under Section 119 of the Act and its validity is upheld it is binding on the Assessing Officer. Not taking recourse thereto and passing the order amounted to making assessment without conducting proper inquiry and investigation as enjoyed by law which was also warranted in the facts of this case and, therefore, the Commissioner was right in holding that such assessment was erroneous and prejudicial to the interest of the Revenue. - Decided in favour of the Revenue

Issues Involved:
1. Validity of CIT's jurisdiction under Section 263 of the Act.
2. Competence of the Assessing Officer to determine the arm's length price of international transactions without referring to the TPO.

Issue-wise Detailed Analysis:

1. Validity of CIT's Jurisdiction under Section 263 of the Act:

The primary issue was whether the Tribunal erred in law by holding that the CIT had validly assumed jurisdiction under Section 263 of the Act. The appellant argued that the Assessing Officer had conducted a proper inquiry and made necessary investigations before concluding that the international transactions were at arm's length. The CIT, however, found the assessment erroneous and prejudicial to the interests of the Revenue on the grounds that the Assessing Officer did not refer the matter to the Transfer Pricing Officer (TPO) as required by CBDT instruction no. 3 of 2003, took overseas AEs as tested parties, and did not consider the findings of the Central Excise Department audit. The Tribunal upheld the CIT's jurisdiction, stating that the Assessing Officer failed to make a proper inquiry, which is a valid ground for the CIT to invoke Section 263. This principle is supported by the Supreme Court's judgment in Malabar Industrial Co. Ltd. v. CIT 243 ITR 83, which held that an incorrect assumption of facts or law, or orders passed without applying the principles of natural justice or without application of mind, satisfy the requirement of the order being erroneous.

2. Competence of the Assessing Officer to Determine the Arm's Length Price Without Referring to the TPO:

The second issue was whether the Assessing Officer was fully competent to determine the arm's length price of international transactions exceeding Rs. 5 crores without making a reference to the TPO. The appellant argued that the Assessing Officer had the discretion to determine the arm's length price and that the CBDT instruction no. 3 of 2003 was not mandatory but merely a guideline. The Tribunal, however, noted that the CBDT instruction mandated that cases with international transactions exceeding Rs. 5 crores should be referred to the TPO. This instruction, issued under Section 119 of the Act, was upheld by the Special Bench in Aztec Software & Technology v. ACIT and by this Court in Sony India Pvt. Ltd. v. Central Board of Direct Taxes and Another 288 ITR 52. The Tribunal concluded that the Assessing Officer's failure to refer the matter to the TPO amounted to making an assessment without proper inquiry and investigation, thus justifying the CIT's invocation of Section 263.

Conclusion:

The High Court affirmed the Tribunal's decision, holding that the CIT had validly assumed jurisdiction under Section 263 of the Act and that the Assessing Officer's failure to refer the matter to the TPO was a procedural irregularity that rendered the assessment erroneous and prejudicial to the interests of the Revenue. The appeal was dismissed, and both questions of law were answered in favor of the Revenue and against the assessee.

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